DeFi is the next phase in the evolution of the blockchain tech and the crypto world. It is guaranteed to sweep through how finance and transactions are done within the next 5 years. Within the decade, legacy financial institutions that continue to serve people through rent seeking methods will find themselves completely disintermediated and obsolete. These will either go bust or be bought over at some point.
The History of Money $$$$
There is a history behind all this talk of decentralised finance, DeFi in short. Today, the countries in the world are still working on the existing model of having a central bank that makes the decisions and policies pertaining to transactions. You are probably familiar with the Federal Reserve (or in our terms, Mr Unlimited Balloon in Balance Sheet) or say, the People’s Bank of China. They act as the central agent in the banking and finance world in their respective countries. In times past, there was a gold standard that set the tone for how value there is behind a currency but this gold standard was removed. (https://www.goldandsilver.org/questions/nixon-remove-gold-standard/) to combat the run on gold reserves.
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The speed of the flow of money was cumbersome and transactions expensive. This started changing with the Internet and with Wright’s law, anything that has to do with tech becomes cheaper with time because the economies of scale can be realised as tech keeps improving on itself. So with better connectivity, cellular networks, cheaper mobile devices, the flow of money improved significantly.
We see this happening as the now fast fading COVID-19 memory brought digital trading to the masses through trading platforms like Robinhood and eToro. With one click of the button, these platforms execute trades without the use of a physical broker who you will have to call if you use the traditional method of trading through a broker. This can also be seen in payment systems as transfer of money and payments become easier.
However, behind the entire backdrop of all the changes taking place in the financial system, one cannot help but have that nagging thought that there is still that level of centralisation that holds the rails of true financial autonomy back.
When something is centralised, it will, to a certain extent, suffer from issues pertaining to flow. To this end, this is what will happen with the blockchain and crypto coming in to disintermediate this space.
Enter DeFi – disrupting money
DeFi is what it is – decentralised. It is fully empowered to rip the hearts out of rent-seeking financial institutions by eliminating their ability to charge fees and penalties and feed the fat cats in the system. It is permissionless in that no one’s permission or approval is required for participation.
No, it is not financial anarchy.
DeFi is not a place of anarchy in that there are no rules. In fact, quite the opposite. It is because of the robust rules and algorithms governing this system that makes all the above possible. The power is removed from institutions fattening themselves up to the human – the single node in this entire “Matrix”, so to speak. Talk about it being fully “customer-centred”!
Banks and their fat cats
For decades, banks keep claiming they are customer-centred, but if this is so, then they should be finding ways to serve the customer better without cumbersome fees and penalties. That is not serving the customer. That is serving the institution and its fat cats sitting around thinking about how to better fatten themselves. The real customer-centricity comes with the blockchain that completely removes the unnecessary layers of costs and profit-making measures.
Right in DeFi, no central authority can freeze your accounts. You decide where to move it, how you want it moved. And who to give your money to. With DeFi, you do not need to submit tons of information about who you are, how much you earn, etc. so that advertisers can pay for this information. The approach behind a zero knowledge proof (ZPK) shows that you can do the minimum disclosure. There are pros and cons about this. But this is where the rules in formulating smart contracts need to be tightened and robust to handle this.
Loans? Trading? Transferring money across borders? Well, who needs a bank and its hefty fees? All you need is DeFi.
Denial of service and facing cybersecurity issues? Well,who needs a bank to fail you when you can prevent redundancy on your own terms via DeFi? Completely decentralised and with near zero disruptions, and nearly impossible to hack. We need to caveat this because if the rules and algorithms were not thought through well enough, they can be compromised.
How about insurance?
Oh yes. We need to mention how coverage can be done as well. So Prudential, Allianz, AXA, and all the other similar fat cats and their risk-sharing models which allow them to pocket fat fees, one blockchain company that is disrupting this space quickly is Nexus Mutual that allows you to share risk using smart contracts. This completely removes middleman the need for a central insurance company to administer the sharing of the risks and benefiting unnecessarily in the process.
Conclusion
Riding on all these are the various cryptocurrency tokens that were established for the purpose of creating the ecosystem that makes DeFi possible.
It is through the utility of the token resulting in demand and supply, that the price of the token is determined. In that sense, when investing in cryptocurrency, it is not about the loudest “moon!” that is being expressed on Twitter. It is about the projects that are already in place or are being set up to disrupt traditional finance.
Watch this YouTube link to understand a little more.
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Right now, here is a list (again, this is not investment advice. Do your own due diligence!) of good crypto and DeFi projects making headway into this space. Check them out and do your own due diligence by talking and discussing them before investing!
AAVE. Rebranded in 2018 with a price performance of 105% in 2021. Transparent on Ethereum blockchain. Has a payments license in the UK.
COMPOUND. Price performance in 2021 of 61%. Known for: yield farming. Has more than $6 billion of value locked as of end June 2021.
ETHEREUM - this is not an alt-coin, but many key projects in crypto 3.0 are built on it.
SOLANA - Key projects like Serum are built on it.
ZILLIQA - BIGGEST disruptor in Asia. Hails from Singapore. Extreme growth rates. Excellent projects built on it. YouTubers @KSI, @MrBeast are all on its $XCAD network.
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Yours,
Chief Editor
BBA Market Perspectives
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